Investing successfully in today's financial markets may seem
as perilous as getting out of Casablanca. If your papers are not in
order, you could be in for a rough time--not from the authorities
but from the swings of stocks. But don't let the bad guys get
to you. There are plenty of steps you can take to assure safe
passage.

When it comes to investing, risk counts as much as reward.
Stocks generally have provided long-term gains, but the financial
markets are still prone to slip-ups, corrections or even meltdowns.
Past performance, as any astute investor can tell you, is no
guarantee of future returns, and salvaging a ravaged portfolio is a
lot harder than protecting one. If you're stretching to make
all you can from your portfolio, you could end up with a nasty
shock . . . at least in the short run. The key is to become
"risk-ready," especially when the financial markets start
to rock and roll.

Being risk-ready means knowing the types of risks inherent in
different kinds of investments. There's inflation risk, when
the return on your investments doesn't outpace the rate of
inflation, and liquidity risk, which means you own an investment
but can't sell it when you want to. These two types of risk are
good reasons to choose stocks as part of a diversified portfolio.
Historically, stock returns as represented by the Standard &
Poor 500 Index have outpaced inflation as measured by the Consumer
Price Index, and liquidity is very high in stocks traded on major
U.S. and foreign exchanges. Strategic asset allocation and
investment diversification can help you sleep better at night, but
even diversification isn't an end in itself. The best defense
is a good offense. With that in mind, here are seven steps you can
take to get your house of investments in order.

1. As time goes by. If you're going to invest in
stocks, keep in mind a trend is just a trend. In short, don't
overreact by trying to time the market. While past performance is
not a predictor of future returns, historical data shows holding
stocks for the long run really cuts the risk. According to a recent
study by Chicago stock research firm Ibbotson Associates, for all
three-year holding periods since 1946, stock returns were positive
93 percent of the time, based on the S&P 500 Index.

Take this hypothetical illustration: If you invested $1,000
every year for the past 34 years and reinvested all dividends in
the S&P 500 Index, your $34,000 investment would have earned
$325,771 if, with the worst timing imaginable, you had invested at
the market high of the year. Of course, if you had perfect timing,
investing your $1,000 at the market low, you would have earned
$365,880. The difference between the extremes? A mere 12 percent;
that's less than 1 percent annually. As a long-term investor,
you avoid the aggravation of trying to get out at the top and in at
the bottom of the market's cycles.

2. The bears wore red; the bulls wore blue. As a rule,
the blue-chip stocks of large, well-
established multinational companies are less risky than the stocks
of small, little known, single-product firms. When the markets
drop, investors often see a "flight to quality," with
money going where investors feel safest: the stocks of big
companies. No stock, large or small, guarantees investor
protection, but large companies are less prone to sudden plunges
and are often the first to rebound when the markets begin to turn
up again.

3. Don't be misinformed. Get your research from a
reliable source--crystal balls and fishing buddies don't count.
In-depth research involves the big picture, including political,
economic and demographic factors as well as specifics of individual
companies.

Technical analysis--using charts and computer programs to
identify price trends--provides other information to help you make
informed decisions. Base your research on facts, not feelings,
hunches or tips.

4. Round up some unusual suspects. Smart investors use
overall asset allocation to ensure their portfolios include
different classes of securities, such as stocks, bonds and cash. In
addition, no stock portfolio should consist of just one or two
companies. Diversification means building a multistock portfolio,
including domestic and foreign holdings, blue-chip and OTC
(over-the-counter) shares, as well as companies in different
industries.

5.The start of a beautiful friendship. If
you're a risk-ready investor, you keep your eye on several
traditional measures of investment value, including
price-to-earnings (P/E) ratios, price-to-sales ratios and book
values. All other things being equal, a stock selling for 60 times
earnings is riskier than a stock selling for 10 times earnings.
Growth stocks come from companies experiencing accelerated earnings
growth; they often sell at high P/Es because investors expect that
higher earnings will result in higher share prices. Value stocks
are generally shares of long-established companies, often those
familiar as household names with predictable long-term earnings
growth rates. As you build a diversified portfolio, emphasize both
value and growth stocks to protect it from excessive risk.

6. Play it again, Sam. Ups and downs in the market make
you queasy, but you still have a financial goal you'd like to
reach? Dollar cost averaging is a simple strategy used by investors
to add to their holdings by investing a fixed amount of money at
set intervals, such as every month or every quarter. This strategy
doesn't assure a profit or protect against a loss in the case
of a market meltdown, but it can help smooth out the effects of
stock price fluctuations. Best of all, you can start with a small
initial investment and make additional small, periodic investments
in managed accounts.

The principle is simple: When the price of shares is lower, your
investment dollars will buy more shares. When the price is higher,
you'll buy fewer shares, but the prices of the shares you
bought when prices were lower will have increased. The key here is
sticking with the program.

Over the long term, assuming that stock prices continue to rise,
the average cost of shares purchased through a dollar cost
averaging plan will usually be lower than the shares' average
price. How? Say you plan to invest $500 quarterly. If you make a
purchase at $10 per share, for example, your $500 investment gets
you 50 shares. If the share price rises to $20 during the ensuing
quarter, your next purchase gets you 25 shares. After two quarters,
your hypothetical purchases would total 75 shares bought at $15
each but with a lower average cost of $13.33 per share.

Because this strategy involves periodic investments, consider
your financial ability and willingness to continue buying through
periods of high and low prices.

7. I came for the stop orders. A stop order is an order
to buy or sell a security at the market price once the security has
traded at what is known as the stop price. If you're
worried about market declines, consider putting protective sell
stop orders in place. A stop order to sell is always set below the
current market price and is usually designed to protect a profit or
limit the loss on a security that you hold at a higher price. It
works like this: Say you bought a stock at $40 per share, and now
its price has increased to $60 per share. A sell stop at $50 means
if your shares decline to $50, your order could possibly lock in a
$10 profit, not including commissions.

While this may sound like an easy strategy, there is, naturally,
more to it. The risk is that this type of stop order may be
executed several points below the stop price because of market
orders placed before it. These market orders could radically change
your order's execution price. To be more certain of the price
at which your order will go off, consider a stop-limit order. This
kind of stop order becomes a sell order only when the specific stop
price is reached. Unfortunately, the stop-limit order carries the
risk of missing the market altogether since the specific price may
never occur. In our above example, say you set a sell stop-limit
order of $50, which is reached but delayed because of market orders
ahead of it. If these market orders cause the stock price to fall
below the $50 stop-limit, your stock will not get sold and
you'll still own it at whatever price it reaches.

Setting stop orders is tricky business because sell orders can
be triggered by temporary volatility. Cautious investors move stop
orders up as stock prices rise, but the trick is to avoid setting
them too close or too far from the price of the stock in question.
Consult your financial advisor for more information on how best to
use stop orders.

Volatile markets are the ones that separate the investors from
the speculators, those who panic from those who profit. Whatever
kind of investing you decide to do, make sure you and your
portfolio are risk-ready. Here's lookin' at you, kid.

All figures are based on the S&P 500 Index and data from
Prudential Securities for informational purposes only and should
not be construed to represent a specific transaction or
investment.